2023-05-18 07:09:50 ET
Summary
- US stock markets have been outperforming for years, but no longer the past months.
- Both international diversification and high dividend investing are a good idea and VYMI gives exposure to both.
- VYM has a meagre 1.63% dividend yield while VYMI yields 4.43%.
- Compared to VYM, VYMI has a better valuation, a better momentum and a higher yield.
International diversification has been a losing proposition for US investors the past decade. Most investors agree that diversification is a good idea. A lot of investors agree that dividend yield is an important element of the total returns equities offer. Due to the US outperformance, US equities are more expensive than international stocks. The Vanguard High Dividend Yield ETF ( VYM ) yields 1.63% while the Vanguard International High Dividend Yield ETF ( VYMI ) yields 4.43%. The past months international stocks are outperforming.
Compared to VYM, VYMI has a better valuation, a better momentum and a higher yield. Enough reasons to make the switch and reap the benefits of both international diversification and high(er) dividend yields.
International diversification
Despite years of underperformance, the case for international diversification remains strong.
International diversification offers downside protection, a cheaper valuation and higher dividend yields. The past months international stocks offer also a better momentum tailwind.
Research by AQR shows that international diversification offers downside protection, certainly over longer horizons.
Over short horizons, global portfolios (the dashed line in Figure 1) can suffer almost as much as an average local portfolio (the dotted line in Figure 1); but over longer horizons global portfolios fare much better. The global portfolio represents the portfolio held by an investor who chooses to diversify globally.
The solid line in Figure 1 shows the globally diversified portfolio’s average return during the worst periods for individual country equity markets. Over longer horizons, international diversification has a good track record of helping when you need it most.
There are two ways a country can outperform other countries. First, you can outperform on a fundamental level: e.g. sales and earnings growth. Second, one can outperform on the price to those fundamentals ratios. This means that your valuation gets more expensive.
The past US outperformance is mostly due to a rising valuation.
It’s possible, but certainly not certain, that the US keeps outperforming on level of the fundamentals, but it’s unlikely that the US stock markets keeps getting more and more expensive.
Due to the US outperformance, US equities are more expensive than international stocks. The Vanguard High Dividend Yield ETF yields 1.63% while the Vanguard International High Dividend Yield ETF yields 4.43%.
High dividend investing
Dividend yield is an important element of the total returns equities offer.
A chart comparing the price return of an equity index with the total return (including reinvested dividends) of that same index shows that it’s actually always a good idea to buy high dividend stocks.
High dividend stocks offer higher returns and at the same time a lower volatility.
And, like international diversification, high dividend stocks offer downside protection.
VYM or VYMI?
So, high dividend ETFs are a good idea. And international diversification is a good idea. Should we buy an US high div ETF like VYM or an international high div ETF like VYMI?
VYM has certainly a better long term past performance.
But the past months international stocks and VYMI are outperforming.
This outperformance is also visible in the alpha creation. The past 12 months VYM created 1.53% of alpha, while VYMI created 3.8% of alpha!
Figure 8: VYM Contribution analysis (Finominal) Figure 9: VYMI Contribution analysis (Finominal)
As a result, VYMI is clearly in a long term uptrend, while VYM is in a downtrend.
When the LT trend is clearly up, we get a green light/colour. Vice versa, when the LT trend is clearly down, we see a red light/colour. In between the colour is orange.
When the ST trend is oversold (a value below 0), we get a green light/colour. Vice versa, when the ST trend is overbought (a value above 100), we see a red light/colour. In between the colour is orange.
So momentum is a tailwind for VYMI. What about valuation? We already showed that VYMI is much cheaper when looking at the dividend yields. VYM has a meagre 1.63% dividend yield while VYMI yields 4.43%
But also on other valuation metrics VYMI is much cheaper than VYM.
We must add that VYM deserves a somewhat higher valuation compared to VYMI due to its higher return on equity and (past) earnings growth. Nevertheless, it’s fair to say that not only on the momentum level but also on the valuation level things look brighter for VYMI.
VYMI
The Vanguard International High Dividend Yield ETF seeks to track the performance of the FTSE All-World ex US High Dividend Yield Index. The index focuses on companies located in developed and emerging markets, excluding the United States, that are forecasted to have above-average dividend yields.
The expense ratio is 0.22% (vs 0.06% for VYM).
The region with the biggest exposure is Europe.
Figure 14: Top 10 holdings (Vanguard)
The ribbon in the price-part of Figure 15 shows the LT trend-colour through time, while the lower part of the chart shows the ST trend. We left out the orange colouring to avoid overloading the chart. Please note that the VYMI’s LT trend turned green recently.
Conclusion
Despite years of underperformance, the case for international diversification remains strong. International diversification offers downside protection, a cheaper valuation and higher dividend yields. The past months international stocks offer also a better momentum tailwind.
Just like international diversification, high dividend investing is a good idea. The Vanguard International High Dividend Yield ETF gives you exposure to both.
Despite its recent outperformance VYMI still has a cheaper valuation, and a much higher dividend yield.
Thanks to its recent outperformance VYMI has a much better momentum. Enough reasons to make the switch from VYM to VYMI.
For further details see:
VYM: Why It's A Good Idea To Switch To VYMI